Small Business

Heading Off Trade Secret Theft

July 30, 2006

A recent survey showed that 58% of office workers have taken office supplies for their personal use. The survey, done by Harris Interactive and lawyers.com, revealed that, along with staplers and paper clips, employees admitted to stealing things that could drastically affect a company's future success, such as classified information. Companies with fewer than 100 employees suffered the greatest losses, the survey showed.

Theft of trade secrets by rogue employees is a serious problem that employers must recognize and prevent, says Lisa Fleming, a partner in the Boston-based law firm of Bromberg & Sunstein. Fleming, who specializes in intellectual property protection, spoke recently to Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

What are trade secrets and why are they so important, particularly to small businesses?

The reality is that every business has a strong interest in protecting its assets, not only its physical assets such as machinery, but also its confidential information. That information, whether it's recipes or manufacturing processes or customer databases, is called "trade secrets." The term covers anything that could have a disastrous effect on a business if it wound up in the hands of a competitor. The formula for Coca-Cola (KO) is probably the most famous trade secret around today.

For smaller employers, there are a number of reasons why the effects of trade secret theft can be so devastating. Often, small firms are think tanks for new technology. Their main competitive advantage is their flexibility and their ability to turn out a new product or a twist on an existing product that gives them an important slice of the market. When an employee leaves for a competing firm or to start her own business, and takes with her valuable confidential information, that can wipe out the small firm's sales.

Who typically steals trade secrets?

It tends to be former employees who've acquired the secrets in the context of their job activity. It might be that they've done research for the company or just learned methods and manufacturing processes in the course of their employment. Sometimes it's people like scientists who have the easiest access to technical information that's highly valued by the firm. But trade secrets can also be advertising plans or financial data that any employee would know about.

What is an employee's obligation when it comes to protecting trade secrets?

Employees have a duty to maintain that information in confidence and not to use it for their own purposes or disclose it to others. This obligation not to disclose extends beyond their employment, not just when they are working for the company. It's a basic tenet of common law, so there's no specific requirement for a written agreement to protect trade secrets.

Some companies, of course, that are concerned about protecting their intellectual property require certain employees to enter into formal written agreements, but there's an implied agreement when someone joins a company that they will keep the company's secrets confidential.

Don't people break that implied agreement all the time?

There's no question that with the rapid growth of new technology and the speed with which our economy is developing, there has been a lot of growth in these cases involving misappropriations of trade secrets.

The first company to develop a key technology in an industry like telecommunications, for instance, gets a huge competitive and financial edge, even if it's relatively short-lived. Losing that edge because of intellectual property theft can have disastrous effects, especially on a smaller company. Losing a key trade secret can mean that a company loses its dominance in a key market, loses millions in sales, and ultimately even fails entirely.

But the pressure that's on companies to stay a step ahead of their rivals can sometimes be too great. There's the temptation to use improperly disclosed information from a former employee. We're seeing it more often in technology companies, but the problem spans all kinds of industries.

We had a company here in Massachusetts that brought an action against some former employees who they alleged took their chocolate chip cookie recipe. We recently had a case where two pharmaceutical companies sued each other after an employee left one firm and started the other one, supposedly taking some confidential information with him. That case resulted in a $78 million verdict.

What can a small business do to try to head off the loss of important information?

I think the best chance to reduce theft is by educating employees and ensuring that they understand their obligations to guard confidential information. Having a clearly written policy that ensures understanding amongst employees about what their obligations are is critical.

How is it best to communicate that policy?

I advise companies to give their new employees a copy of the policy during the hiring process. Either include it as part of an employee manual that must be signed showing that they received and read the information, or make it a separate but simple nondisclosure agreement that the employee must sign. Certainly, this kind of thing would be most important for your scientists, your technical staff, and the people working in your financial and marketing areas.

Once you have those policies and agreements in place, how else can you maintain vigilance about protecting your company's confidential information?

Business owners who are concerned should safeguard their information by securing physical files with keys, or computer files with passwords. They might also want to secure certain parts of the building, so they don't allow public access to manufacturing plants or offices where key employees are developing new products.

It's not a bad idea to give people access only on a need-to-know basis. If there's a legal case at some point, the court will consider whether the company has taken reasonable steps to protect the sensitive information.

Where can entrepreneurs get advice and the legal framework to do that protection?

Employers can draw upon their human-resources personnel or consultants in this area. They should also have attorneys who are savvy about this part of the law review their plans and legal documents, to maximize their protection. It's an area fraught with expensive litigation, so it's important to make sure up-front that your written agreements and company policies are as strong and as specific as they can be, so they'll stand up in court.

The other thing to do is to make sure that your employees are happy so you can have high retention rates. When people leave, if you have a chance, do exit interviews where you remind them of their confidentiality obligations. If they walk out the door mad, it's going to be difficult, but you'll need to monitor potential misappropriation as best you can. Keeping an ear to the ground or the industry grapevine sometimes works best.